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Sales Tax Slice: Will a New Bill on the Hill Codify Quill?

Last
week’s hearing announcement for the No Regulation Without
Representation Act
(H.R. 2887) made headlines as the first to address online sales nexus in three
years. This is significant because closely-watched competing bills like the Marketplace
Fairness Act[1] and Remote Transaction
Parity Act have
been notably sidelined by the U.S. House Judiciary Subcommittee on Regulatory
Reform, Commercial and Antitrust Law. The bill, which aims to codify Quill, is attempting to beat back a
surge of recent state measures authorizing the collection of sales tax across
state borders. If passed, as reported by Bloomberg BNA’s Jennifer
McLoughlin, states
would be prohibited from imposing collection and reporting obligations on
e-retailers and out-of-state sellers making sales within a state if the seller
does not have physical presence in that jurisdiction.

State
autonomy is a concern shared by both bill proponents and opponents. Bill supporters believe that “regulations
that constrict and tax businesses outside of state borders challenge
state sovereignty and
federalism while making it incredibly difficult for small
businesses to flourish under the backbreaking weight of regulations” Some opponents, on
the other hand, have also cited
constitutional principles of state autonomy suggesting that Congress is encroaching on states’ sovereignty.

A review of recent state legislative activity may explain the renewed push for this
type of congressional action on the issue.

Back in
November, the co-sponsor of the bill, Rep. Jim Sensenbrenner (R-Wis.), wrote an
op-ed for The Hill where he called out
South Dakota and Alabama for “ignoring Quill and
passing laws that require online retailers to pay state taxes.” He feared more
states would join. And they did.

Over the last year, states have escalated the fight to stabilize their
eroding tax base using directives, regulations, and
legislation. The ballooning market share of commerce that online
retailers enjoy has resulted in revenue losses for states, who are unable to
enforce collection of sales tax if retailers do not have physical presence in
their state.

The formula triggering “economic nexus” adopted by many of these states
generally involves meeting an annual dollar threshold of sales (ranging from as
little as $10,000 in Washington to $500,000 in Massachusetts),[2] and a minimum
number of separate transactions (generally 200) in the state. A few states
require both elements, while others require only one.

Although Alabama and South Dakota are credited with leading the way, only
Alabama’s regulation has actually gone
into effect. Its “simplified remittance program”
has collected $39.1 million this fiscal year,
as reported by Bloomberg BNA’s Ryan Prete. Meanwhile, South Dakota’s law has been
suspended, and is awaiting review in its state supreme court. It might not be a coincidence that the president-elect of the National
Conference of State Legislatures, an organization that openly opposes the No Regulation
Without Representation Act, is a state senator from South Dakota (Sen. Deb Peters). Of the four witnesses called to
testify during the July 25 hearing on H.R. 2887, she was the lone witness not in favor of the bill.

While many
states would welcome a direct challenge of their economic nexus laws, viewing
it as a path to the Supreme Court and a reconsideration of the Quill decision,
not all are interested in a legal battle. North Dakota, for example, installed in its
economic nexus bill, an effective date that is contingent upon “the United States Supreme Court issu[ing] an opinion
overturning Quill v. North Dakota … or otherwise confirming that a state may
constitutionally impose its sales or use tax upon an out-of-state seller.” Vermont
has a similar provision in its bill.

This issue is of particular concern for states that do not impose an
income tax, since they must rely more heavily on revenue from sales tax. Among
these, Washington, the most recent state to join the ranks, estimates an “additional $1
billion over the next four years” as a result of their online sales tax expansion. In contrast,
enforcement of Tennessee’s economic nexus
regulation, which was set to go into effect in July, has been suspended by a
local court pending a challenge earlier this year, according to Bloomberg BNA’s
Che Odom.

Not all states have been successful making it past their first hurdle,
however. Similar measures establishing economic nexus came close in Maine,
Florida, Utah, Georgia, and North Carolina. Interestingly, Georgia’s attempt would have used
its increase in sales tax revenue to finance an income tax cut.

Whether
this hearing is an indication of congressional willingness to finally act on
this issue is yet to be seen. If so, H.R. 2887 is probably not what the states
had in mind. It is certain, however, that we will see more attempts by the
states to collect tax on online sales until there is finality on the issue at
the federal level.

Continue the discussion on Bloomberg
BNA’s State Tax Group on LinkedIn: Do you think the No Regulation
Without Representation Act has a future? Will the states continue to try to
expand their definition of nexus if the bill becomes a law?

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